Why do so few institutional investors walk the talk on hedge funds?
Aug 30th, 2007 | Filed under: Institutional Investing
Several media outlets report this week on a recent study by Northern Trust covering institutional investments in hedge funds. The central conclusion of the study is that pension plans seem not to walk their talk on hedge funds.
It’s true that the report, based on a survey of pension fund managers, questions why institutions are not yet comfortable with hedge funds. But a careful reading of it (available here) suggests that the genie is out of the bottle when it comes to the search for alpha. Institutional hesitation stems mostly from current hedge fund business practices. And while operational challenges remain a barrier to acceptance by some, the report clearly shows that institutions still value what hedge funds aim to deliver: alpha.
The study says that institutional investors fall into one of two categories:
“…when it comes to their involvement in hedge funds, institutional investors fall into two groups: pragmatists and fundamentalists. The first group perceives hedge funds as but one of many credible strategies for generating alpha…the second group believes that investor appetite for hedge funds will evaporate as markets continue to recover. After all, many investors chase returns, not asset classes. [They believe] beta will remain the main source of wealth creation in the medium term.”
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